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How is Sri Lanka's economic crisis affecting India?

Inflation has soared past 17%. People are dying while waiting in queues for fuel, and authorities are scrapping school exams after running out of dollars to import paper and ink. Sri Lanka is going through its worst economic crisis since its Independence. And the ripples are now being felt in India too. Driven out by hunger and loss of jobs, people from the island nation are seeking refuge in India, which is doing its best to help the neighbouring country.

India has extended financial assistance to the tune of $2.4 billion in the last three months to Sri Lanka, which includes a $400 billion RBI currency swap, deferral of a $500 million loan and a $1.5-billion credit line for importing fuel, food and medicines.In addition to an International Monetary Fund Bailout, the southern neighbour has sought credit support of $2.5 billion from China.The island has been facing daily power cuts and double-digit inflation, which hit 17.5% in February. The Sri Lankan central bank allowed the local currency to devalue by 30% in a month.

The crisis has been mainly caused by a shortage of foreign exchange reserves. They have plummeted 70% in two years to just $2 billion at the end of February, which can barely cover two months of imports. Meanwhile, the country has foreign debt obligations of about $7 billion this year. The forex crisis is the result of several factors.

Tourism, which is the country’s third-largest foreign exchange earner, came to a virtual halt after the 2019 Easter Sunday suicide bombings which killed more than 250 people. Tourist arrivals dropped by as much as 70%.And then the pandemic struck, dealing a severe blow to the tourism industry. And remittances from foreign workers, which is the nation’s biggest source of dollars, slumped 22.7% to $5.5 billion in 2021.The country’s heavy dependence on imports for essential goods like sugar, pharmaceuticals, fuel, pulses and cereals worsened the crisis. The government’s ban on chemical fertilizers last April as it looked to become the first country to fully adopt organic farming backfired. A survey showed that 90% of Sri Lanka’s farmers used chemical fertilisers for cultivation.

The move led to a drastic drop in domestic food production, pushing up food prices.


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